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#34582 - 09/25/02 06:02 PM Courtesy Overdrafts
KK Offline
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KK
Joined: Jan 2002
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Southern California
We are looking to offer courtesy overdrafts and I would love to bounce a few questions to anyone who currently offers them. Anyone game?

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#34583 - 09/25/02 06:14 PM Re: Courtesy Overdrafts
rlcarey Online
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rlcarey
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Galveston, TX
Define "courtesy overdrafts" please??
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#34584 - 09/25/02 06:22 PM Re: Courtesy Overdrafts
Anonymous
Unregistered

We are currently setting up an overdraft limit / courtesy payment and I have questions as well.. go ahead... you go first...lol

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#34585 - 09/25/02 06:26 PM Re: Courtesy Overdrafts
KK Offline
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KK
Joined: Jan 2002
Posts: 249
Southern California
Courtesy overdrafts if I understand it correctly, is a service that allows checking account customers to overdraw their accounts subject to some predetermined limit. They are charged a fee for each access. It's the new and improved version of overdraft lines of credit.

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#34586 - 09/25/02 06:30 PM Re: Courtesy Overdrafts
Anonymous
Unregistered

If this is the same as my former employer's the examiners do not care for it. It's a 'non-contractual' overdraft line of credit. Some regulators will cite banks immediately because they are incenting their customers to overdraw their accounts. Just get all of the facts and be very careful.

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#34587 - 09/25/02 06:32 PM Re: Courtesy Overdrafts
rlcarey Online
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rlcarey
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Galveston, TX
The customer may or may not be aware of their limit but there is no actual agreement at any time to actually pay an overdraft - right? If this is the case, this process has been discussed before - you may want to do a search. If not - ask away!
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#34588 - 09/25/02 06:51 PM Re: Courtesy Overdrafts
BBoyd Offline
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BBoyd
Joined: Mar 2002
Posts: 2,494
MI
In reply to:

Courtesy overdrafts if I understand it correctly, is a service that allows checking account customers to overdraw their accounts subject to some predetermined limit. They are charged a fee for each access. It's the new and improved version of overdraft lines of credit.



We have just implemented this. We have Jack Henry software, and are using Pinnacle's "Bounce Protection" program. Each DDA account type has an assigned limit for Bounce (e.g., Reg. DDA - $300, Special DDA $400, Sr. Checking $500, etc. - up to $1500 I believe). It is not a line of credit and doesn't work like one. The customer having a $100 balance who writes a check for $200 will show a negative balance of $-100 in their account, but the check will pay because of the $300 Bounce limit. They can technically overdraw their account $300 before we start sending nasty-grams. (In fact, there's a whole process for customer letters - from introduction of the program to the "first time user" to the "we're shutting it off now because you were bad" letter.) As each check is paid, however, our overdraft fee is applied to the account. The customer benefit: we pay their mortgage (or whatever) check so they don't get fees at the other end. Our benefit: fee income.

There's also a program for repayment if they are overdrawn so far that they can't - by making a deposit - bring their account to a positive balance. They call it Fresh Start and during the repayment process there's no Bounce Protection allowed. Also - we don't automatically put it on new accounts. They have to be opened at least 30 days and be "in good standing." The customer CAN request to not have it at all and the Bank can remove it for cause. Let me know if you have any other questions and I'll try to answer them.
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#34589 - 09/25/02 07:05 PM Re: Courtesy Overdrafts
rlcarey Online
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rlcarey
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Galveston, TX
You know - I have been involved in these programs before and you do need to be careful that you don't inadvertently trigger the definition of a credit under either Reg Z or Reg B.

The other thing, and this is only my personal opinion, is that by many banks making this product walk and talk like a duck, before you know it, you are going to see Reg Z and Reg B expanded to include ducks in their definitions.

While I was involved with some of the first banks that developed automated overdraft decisioning software and within that software we developed matrices that would pay or not pay customers into the overdraft based on a number of factors, those programs were never revealed to the customers. However, by marketing this strategy to the public and selling it as a feature of the product, banks are going to eventually bring the wrath of the regulators upon themselves again. Sometimes we only have ourselves to blame.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#34590 - 09/25/02 07:47 PM Re: Courtesy Overdrafts
BrendaC Offline
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Sweet Home AL
Kirchman published an article in their August Executive Alert regarding the current status of some informal overdraft programs. Because the bank reserves the right not to pay some items under some of these programs, some states have apparently determined the programs to be illegal (such as Indiana). The letter from the Indiana Department of Financial Institutions stated the Department would take whatever steps necessary to make a bank cease and desist from participating in a transaction that could be considered a criminal offense. You might want to get your hands on that article, "Overdraft Protection Programs: Are They Criminal?" (I tried to access the article via Kirchman's Web Site, but it wouldn't come up for me.)
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#34591 - 09/25/02 08:13 PM Re: Courtesy Overdrafts
rlcarey Online
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rlcarey
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Galveston, TX
Interesting approach in Indiana. If your interested - here's the Kirchman article:

Executive Alert

Basically they are saying that it is a criminal offense in every state to knowingly write a check without sufficient funds in your account and now the banks are encouraging their customer to do so - handcuff those accomplices!!!
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#34592 - 09/25/02 08:18 PM Re: Courtesy Overdrafts
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
Excerpts from the Kirchman Letter: Over draft Protection Programs?

On August 3, 2001, the Comptroller of the Currency issued Interpretive Letter # 914 harshly criticizing such programs. The Comptrollerís letter didnít say that a bank couldnít have an overdraft program. The letter only expressed the Comptrollerís laundry list of concerns about the program.

On February 21, 2002, the State of Indiana Department of Financial Institutions issued a letter stating that, in its opinion, overdraft protection programs may be criminal.

The link to Kirchman: http://www.kirchman.com/comply/alerts/ea0802.pdf#page=2

The link to the IN DFI: http://www.dfi.state.in.us/OVERDRAFT/Default.htm
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#34593 - 09/25/02 08:27 PM Re: Courtesy Overdrafts
rlcarey Online
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rlcarey
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Galveston, TX
If the companies that sell this product to banks - or the other favorite to skirt required reserves through shadow accounts - are relying on only one product to make a living - I would recommend that they diversify their product line or I think they may eventually be in trouble.
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#34594 - 09/25/02 08:48 PM Re: Courtesy Overdrafts
Dan Persfull Offline
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Bloomington, IN
I agree with that assessment 100%.

We stayed away from such a product even before the IN Letter. We use striclty an Overdraft Line of Credit.

For those considering this product, or are using this product, please check your state opinions if you haven't already done so.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#34595 - 09/26/02 02:15 PM Re: Courtesy Overdrafts
RVFlyboy Offline
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Soaring over Georgia
I think Indiana is stretching it a bit to come up to the level of this being criminal. If a customer writes a check that presents to the bank against insufficient funds, we have two choices: 1) We can return the check and charge the customer an NSF fee of $29. 2) We can pay the check into overdraft and charge the customer an NSF fee of $29. Consider that with option #1 the customer may also have to pay an additional return check charge if the check was payable to a retail business, for example. All told, the customer may be charged upwards of $60 and suffer the embarassment of having his check returned. Somebody needs to help me understand what is criminal about making a systematic decision to take option number 2 for those customers that generally keep their banking affairs in order and regularly make deposits to their accounts to keep them in a positive status.
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#34596 - 09/26/02 02:28 PM Re: Courtesy Overdrafts
BrendaC Offline
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Sweet Home AL
My understanding is that the bank is encouraging the customer to break the law by writing a bad check since there is no guarantee the check will be paid by the bank. The formal overdraft programs with contractual agreements to pay checks up to a predetermined overdraft credit limit appear to be OK. It is the informal program which provides the bank the OPTION to pay the item which are in question.
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#34597 - 09/26/02 02:35 PM Re: Courtesy Overdrafts
RVFlyboy Offline
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Soaring over Georgia
I still think it's a stretch to say that by informing customers that if they keep their finances in order and regularly deposit to their account we are likely (not guaranteed) to favorably consider paying their overdrafts up to a certain limit is encouraging or incenting them in any way to write bad checks.

Now, I have seen some banks take the marketing of their programs of this nature to that extreme - where they tell customers not to worry if they need a little extra cash - just write a check and we'll cover it up to this much. But that's a problem with the marketing, not with the program.
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#34598 - 09/26/02 02:48 PM Re: Courtesy Overdrafts
rlcarey Online
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Galveston, TX
OK Jim - I'll bite:

You know as well as I do that this product feature is not marketed to "those customers that generally keep their banking affairs in order and regularly make deposits to their accounts to keep them in a positive status". This is marketed for the sole purpose of increasing fee income and it is the banker's equivalent to a pay-day loan. (I wouldn't call bringing your account to a positive balance once every 30-days as keeping your affairs in order.) Call it what you will, or spin it the way you want, but here are the marketing lines from a couple of banks - you make the call. By the way, I think some of these are really borderline statements when it comes to Reg B and Z.

"As long as you maintain your account in good standing (defined as making regular deposits and bringing your account to a positive balance at least once every 30 days), XXXXXX Bank may honor overdrafts up to the Bounce Protection limit on your account."

"How quickly must I repay my Bounce Protection? You should make every attempt to bring your account to a positive balance within 30 days."

"At times, unanticipated expenses or unforeseen problems can leave you with too little cash in your checking account. Having a check returned due to insufficient funds can be an embarrassing and humiliating experience. At XXXXXXX National Bank, we want to do our part to save you from such an experience." (Tell me this does not encourage customers to write checks when they know they have no money in the account.)

"However, if you maintain your account in good standing (defined as making regular deposits and bringing your account to a positive balance at least once every 30 days) and there are no legal orders outstanding, we may approve your reasonable overdrafts as a non-contractual courtesy." (This bank even prints what the $ limits are for the specific account types - my question is - is the bank going to do this or not? - why the need for all the conditions on a non-contractual courtesy?)

"This privilege is extended to provide you peace of mind, knowing your transactions (checks, ATM withdrawals, and/or other debit transactions) may be honored up to your assigned limit." (The privledge "is" or "may" - which is it?)

Anyway, I think you get my point.
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#34599 - 09/26/02 03:20 PM Re: Courtesy Overdrafts
Dan Persfull Offline
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Bloomington, IN
rl, you responded to Jim much better than I could, but you hit the nail on the head when you said this is the equivalent to the banks making pay day loans and that is one of the approaches IN is taking, but their main focus is on the idea that the banks are encouraging customers to knowingly write bad checks, which in most states is a criminal offense, in order to gain additional fee income. And, based on the sample promotions Iíve seen and the ones you provided it is clear, or least to me, that banks are encouraging the customers to write bad checks with no guarantee that the bank will cover them.
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#34600 - 09/26/02 04:43 PM Re: Courtesy Overdrafts
RVFlyboy Offline
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RVFlyboy
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Posts: 5,980
Soaring over Georgia
I think that's what I said - that it's the marketing of the programs and not the programs themselves that are the problem. Those of us that would like to use these programs as a positive feature for our customers are being tarred with the same brush as those that are engaging in unscrupulous marketing. It's kind of like the debate with subprime lending vs. predatory lending.

I don't think you'll ever be able to make a case for the charges being equivalent of interest, because the charge is not related to the extension of credit (the overdraft) - it's the same charge that would have been assessed if there had been no extension of credit (i.e., the item had been returned). That's why the exclusion for overdraft fees was specifically put into Reg Z.

I just think it's bad policy for Indiana (and any others) to try to make the case that these programs are illegal. I'd much rather see them try to make the claim that the marketing tactics used are illegal than the programs themselves. That I wouldn't have a debate with.
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Jim Bedsole, CRCM, CBA, CFSA, CAFP
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#34601 - 09/30/02 03:04 PM Re: Courtesy Overdrafts
Lestie G Offline

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Near the Land of Enchantment
This may be taking it to the extreme, but couldn't the Indiana view be taken to a higher level by some clever plaintiff's attorney? What's to prevent that view from being interpreted that any pattern of paying NSF items causes the customer to have a reasonable expectation that we'll pay others, thereby causing them to write hot checks?
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#34602 - 10/10/02 09:45 PM Re: Courtesy Overdrafts
KK Offline
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KK
Joined: Jan 2002
Posts: 249
Southern California
BBoyd

I'm guessing that you have not been through a regulatory examination covering this product since it is new for you. Who is your regulator and did you discuss the product with them before implementation?

Thanks

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#34603 - 10/10/02 10:36 PM Re: Courtesy Overdrafts
BBoyd Offline
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BBoyd
Joined: Mar 2002
Posts: 2,494
MI
I was not involved with implementation - only in passing on information via this site! But you've piqued my interest and I'll pass it on to those involved! Thanks!
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#34604 - 10/10/02 11:16 PM Re: Courtesy Overdrafts
SJB Offline
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SJB
Joined: Jun 2002
Posts: 1,210
California
If a do-good plaintiff's group will pursue a class action for senior citizens because their overdrafts were covered by subsequent social security deposit (Lopez, now reversed) I don't think it will be long before they jump on these "plans" - I wouldn't want to be in their sights when the shot is fired!

See if the company promoting this product will indemnify, hold harmless and defend your bank against such claims and see what they say - could be fun!
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